by Linda Suzzanne Griffin
The Internal Revenue Service (the “Service”) has announced in Rev Proc 2005-78, 2005-51 IRB, IR 2005-138, that the standard mileage rate will drop from 48.5¢ to 44.5¢ per business mile. The rate for computing deductible medical or moving expenses will drop from 22¢ a mile to 18¢ a mile. Although the rates will drop from the latter part of 2005, the rates are higher than in the first eight months of 2005.
Advice:
Use the rates when reimbursing employees and to calculate your deduction on your return.
Private Letter Rulings
In Revenue Procedures 2006-1, 2006-8 and 2006-9 the Service dramatically increased the user fees to obtain private letter rulings. The fee depends on the specific type of ruling that you request. For example if you request a ruling for certain matters applicable to an individual retirement account , then the ruling fee increased from $2,750 to $9,000.Prior to these procedures reduced fees applied for taxpayers whose income was under a threshold amount. Certain of those lower rates are not available after January 31, 2006.
Advice:
Before applying for a ruling be sure that you review these procedures to find the fee. The increase in the Service fees together with the attorneys fees will make many taxpayers play the audit “lottery”. You must have a very good issue to apply.
Taxation on Early Individual Retirement Account (“IRA”) Distribution
In Millard v. Comm’r., T.C. Memo. 2005-192, the Tax Court heard a taxpayer’s creative argument to avoid a tax on IRA premature distribution. In May of 2001, Mr. Millard requested the bank to close out his IRA. The bank issued a check to Mr. Millard and issued Mr. Millard a 1099-R in the amount of the distribution. Mr. Millard, however, did not present the check for payment until March of 2003. He did not include the amount in his 2001 gross income and the Service determined a deficiency and a 10% premature distribution tax penalty. Mr. Millard argued that because he did not endorse the original check until 2003, the account remained opened and therefore it remained property of the bank and did not constitute income to Mr. Millard.
The Tax Court disagreed, and stated that while state law created property interests those interests did not supersede the federal doctrine of constructive receipt. Section 408(d)(1) of the Internal Revenue Code (the “Code”) provides that any amounts paid or distributed from an IRA must be included in gross income.
Advice:
It is extremely important to pay close attention to IRA distributions. If you receive a distribution too early, then a 10% penalty will be imposed and the distribution will be taxable if you do not roll it over within sixty (60) days of receipt. Therefore, it is best that if you are changing IRA custodians to transfer funds directly via a trustee to trustee transfer.
Charitable Unitrusts
In Rev. Ruls. 2005-52 through 2005-59, the Service issued sample documents for charitable remainder unitrusts. These replace the samples issued in 1989. These forms are extremely helpful and have commentary on the changes. The documents include alternative provisions for (1) payments of the portion of the unitrust to charity, (2) early termination of the trust upon a happening of certain contingency, (3) restricting the remainderman to a public beneficiary, (4) retaining the right to substitute the charitable remainderman, (5) granting the unitrust beneficiary the power to name the charitable remainderman, (6) payment of the lesser of the net income or percentage amount and (7) payment of net income with a make up provision and (8) flip trust language. A key item not addressed is a waiver of the elective share provisions as required in Rev Pro. 2005-24.
Advice:
While these forms are substantially better than the old forms, you need to tailor each form to your particular situation. You may wish to include a trust provision restricting trust assets from any assignment, interference or control by any creditor, spouse or divorced former spouse and set out the donor’s obligation to secure an appropriate waiver.
Estate Tax Discounts for IRAs
In the recent case of the Estate of Doris F. Kahn, 125 TC No. 11 (2005), the Tax Court held that the estate could not discount the value of an IRA for the income taxes to be paid by the beneficiaries or for lack of marketability. The estate argued that the willing buyer-willing seller test mandates that the fair market value should be reduced to reflect the income tax liability. Further, because the IRA is not transferrable, the IRA is unmarketable. The Service distinguished the analysis of the IRA sale because the IRA cannot be sold; rather, only their underlying assets may be sold. Because IRAs cannot be sold, the hypothetical sale between a willing seller and a willing buyer would not apply to the IRAs, but to the underlying assets. The Tax Court determined that the line of cases applicable to lottery payments, closely-held stock, contaminated land, etc. did not apply to IRAs because the tax burden associated is never transferred to a hypothetical buyer. The Court also noted that the beneficiaries are allowed the deduction under Section 691(c) of the Code in the amount of federal estate tax paid on the items of IRD included in the distributions.
Advice:
This decision in this case is consistent with the decision also in John David Smith, Executor v. U.S., (CA 5 2004) 94 AFTR 2d 2004-6891. Obviously if your client attempts to take this discount, then the Service will object. Further your client may face penalties because of the decisions that have been rendered,
New Exemptions for 2006
The estate tax exemption for the year 2006 is now two million dollars and the corresponding applicable credit is 780,000. You may now make gifts to an individual of $12,000 per person, per year. The generation-skipping transfer tax exemption is two million dollars and the gift tax exemption is still one million dollars.
Advice:
As the exemption has risen dramatically over the past few years, it is important that for those clients who have the traditional family/marital trust, the plans be reviewed because the amount to be distributed to the family trust may now equal to the whole estate, thereby possibly disinheriting the spouse or reducing the amount the spouse receives.
Reconstructing Records
In Facts Sheet 2006-7, the IRS gives tips on reconstructing records after a disaster. The following are examples:
(1) Personal residence and real property: (a) Take photographs immediately after the casualty to establish the extent of the damage. (b) Contact the company that handled the transaction to obtain copies of the escrow papers. (c) Use the current property tax statement. (d) File IRS Form 4506, Request for Copy of Tax Return, for copies of previous years tax returns. (e) Check the insurance policies. (f) Call contractor(s) to see if improvements are made. (g) Obtain written accounts from friends and relatives who saw the house before and after any improvements.
(2) Vehicles: Check the Kelly’s Blue Book, newspaper ads, etc.
(3) Personal property: Take pictures of each room prior to the casualty and draw a floor plan showing where each piece of furniture was placed.
Advice:
Now is the time to make plans for reconstructing hurricane losses. Take videos, pictures, etc. of your home. Store this in several locations. Even send copies to relatives in different states.
Sales Tax Deductions
In IRS Fact Sheet 2006-9, the Service reminded individuals regarding their sales tax deductions. Most individuals who itemize have the option of either claiming state and local income tax deductions or state and local general sales tax deductions. Florida has no individual state income tax. You can either take the sales tax deduction based upon the sales tax tables or from your actual receipts.
Advice:
It is a good idea to put your receipts in an envelope during the year. You can use either the tables or your actual receipts.
Recent Favorable Life Insurance Letter Ruling
In Private Letter Ruling 200603001 the Service found that a taxpayer who “intended” that a life insurance policy be transferred to an irrevocable trust, even though the “policy facts” indicated that the transfer was not made, could “reform” the policy to show the trust owned the policy and that such reformation was not a gift and would not be included in either husband’s of wife’s estate if they died within 3 years of the transfer.
Under the facts of this letter ruling a husband and wife transferred individual policies to an irrevocable life insurance trust and executed an instrument entitled “Transfer by Gift”. The trustee was to exchange the policies for a second to die policy. As you can guess the insurance agent did not actually make the transfer.
The Service determined generally the “policy facts” control, i.e. what actually happened on paper but there is an exception for “intent facts’ , if the insurance contract itself does not reflect the instruction of the parties as where an agent inserts a reservation of right to change a beneficiary contrary to the intentions of the parties.
There was another issue regarding a gift tax issue which was found against the taxpayer- interestingly not even brought up by the taxpayer but ruled on anyway by the Service.
Advice:
This ruling shows that it may be advisable to execute some document that shows exactly the gift made to the trust. More importantly it is critical that you see the document that actually makes the transfer to the insurance trust. Also do not forget if you ask for a ruling the Service can look at other issues that may be detrimental to you. Remember also that private letter rulings are only applicable to the taxpayer who requested the ruling.
All Contents © Copyright Linda Suzzanne Griffin, P.A.
